Objectives of firms Flashcards
Why profit maximise?
Profit is the reward for enterprise, greater dividend for shareholders the owners of the business- keep them happy
More money to re-invest, remain competitive improve dynamic efficiency over time, lower costs lower prices, improve quality/ range of products, maintain/ increase market share
Profit satisfying
Where the owners of a business set a minimum acceptable levels of achievement in terms of revenue and profit.
Often due to divorce of ownership and control
satisfy as many stakeholders as possible:
Who are the main stakeholders of a business?
those who have an interest in the actions of the business
shareholders, workers, mangers, consumers, government, environmental groups
Sales maximisation
Supplying the largest output possible consistent with earning at least normal profits where AR=AC
Flood the market, spread awareness about products
build a consumer base, establish consumer loyalty
build market share
economies of scale, lower average costs
enable it to make large profits in the future, as can increase prices, build monopoly power
Limit pricing @ AC=AR normal profit- reduce incentive for other firms to enter the market
Occur due to divorce of ownership and control- if mangers pay is based on sales
Revenue maximisation
MR=0
illegal predatory pricing, forces them to make a loss
gain market share, build consumer base and brand loyalty
economies of scale- Lower LRAC
Larger profits in long run, able to increase prices in the future, establish monopoly power
may also occur due to principle agent problem
CSR
integrating environmental and social considerations into a firms behaviour
build an ethical brand image- consumer base
treatment of workers well- higher MRP, efficient wage theory- higher labour productivity- lower AVC
Favoured by local governments- lower legal costs, legislations in their favour
Objective of public sector organisations
Allocative efficiency, maximising social welfare
Producing @ P=MC
Issues with public sector run businesses
Lack of profit motive- lack of incentive to be
lack of competition- x-inefficeny, lack of incentive to be dynamically efficient in terms of cutting costs
cost, opportunity cost
diseconomies of scale
principle agent problem
greater risk of moral hazard
Benefits of nationalisation
economies of scale
allocative efficiency, take into account externalities produce welfare max, free/ price at which consumption levels at social max
vehicle for macroeconomic control: able to control wages, determine incomes and employment levels during different stages of economic cycle
Benefits of privatisation
Profit motive- more efficient
higher competition- more efficient
more supernormal profit= higher dynamic efficiency
less cost to public sector, generates one time revenue from sale
Costs of privatisation
could lead to worse efficiency outcomes- less likely to take into account for externalities , will not produce at P=MC, not alloactively efficient
if a public monopoly broken up= loss of economies of scale
may not increase competition by much, turn into a private monopoly/ highly concentrated oligopolistic market where efficient outcomes eg productive are worse
